Bumpy road ahead for Chinese economy

Updated: 2012-10-29 23:02

(chinadaily.com.cn)

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Statistics from the United Nations indicate that China absorbed $59.10 billion in foreign direct investment in the first half of 2012, surpassing the United States' $57.40 billion as number one in the world. Some foreign research reports also show about $225 billion to $300 billion was taken out of China in 2011, says an article in 21st Century Business Herald. Excerpts:

This phenomenon reflects how China's international balance of payment is faced with complicated risks of capital fleeing. China's 7.7 percent growth, though lower than before, is still the strongest in a world in a global recession, which makes yuan the safest short-term speculative investment target of international hot money. The recent moderate appreciation of the yuan reinforces this view.

Yet, the difficulties for China's economic recovery are evident. Government investment is still the main driving force — not consumption or export — of economic recovery. The excessive production capacity of some important industries and an aging society only make the road ahead for the Chinese economy even bumpier.

China will be forced to upgrade its industrial structures and eliminate backward productions.

It is predicted that the appreciation of the yuan against the US dollar is temporary, and the appreciation is largely attributed to the international speculators' risk-taking investments, which actually increases the risks and uncertainties of China’s international balance.

Even if it is not yet verified by the authority, about $300 billion was taken out of China last year, China's outstanding funds for foreign exchanges maintained negative growth from last year to this August. It indicates the capital outflow is already a notable problem for China.

Chinese authorities should do more research on the risk characteristics of current international balance changes and prepare more excess reserves to adjust China's investment models of its foreign exchange reserves accordingly to avoid risks.